Analysis: Italian market in a state of flux

Italy’s economy is crumbling with former Prime Minister Silvio Berlusconi forced from office to be replaced by Mario Monti, who has gallantly waived his salary as he looks to drag the country back from the brink of financial collapse.

Monti’s government has passed a series of austerity measures that have already affected the gambling sector. The withdrawal of horseracing funding saw the industry shut down for most of January leading to a 56% year-on-year decline in revenues for the month. This was followed by the country’s 10 gaming machine operators being fined for allegedly failing to comply with regulation.

In February, Italy’s 10 gaming machine operators (Snai, Lottomatica, Sisal, Cirsa, Codere, Cogetech, G.Matica, Gamenet, B Plus Giocolegale and HBG Gaming) were handed total fines of €2.5bn by the government’s audit department, the Corte dei Conti, for allegedly failing to connect their systems to a central reporting network overseen by AAMS, designed to allow the authority to calculate the tax each company should pay on video lottery terminals (VLTs).

The operators in question have pledged to appeal the verdict as the fines could put them in dire financial straits and give foreign brands a chance to muscle in on the market. But with revenues from core verticals dwindling and high levels of debt stifling budgets, a change could occur whatever the outcome of the case.

The Corte dei Conti had initially sought to fine the 10 companies a total of €90bn for the time the machines were not connected to the reporting network, based on a fine of €50 for every hour each machine was not connected. While the €90bn fine ““ Lottomatica was fined €4bn and Snai €4.8bn, although the Ministry of Finance refused to reveal the amounts sought from the other eight operators ““ may seem high, working on the assumption that there are around 300,000 gaming terminals in Italy, the operators would be liable for a combined fine of €360m each day the machines were not connected.

And considering the machines were offline for three years between 2006 and 2008, the revised total of €2.5bn could be a fair compromise.

Despite the high sums the Italian population lavishes on gambling (Italians spend approximately €300 per adult on gambling every year compared to €230 in the UK), the majority of Italy’s gaming operators, are laden with large amounts of debt and dwindling revenues.

Lottomatica revealed debts of around €2.86bn in June last year, while Snai reported a net debt of €361m in its figures for the three months ending 30 September 2011. Snai was also the first operator to reveal how its potential fine would impact the organisation, pulling out of its €140m acquisition of Cogetech in late February. Had Snai gone through with the deal, it would have been liable for Cogetech’s €255m fine alongside its own €210m penalty. Coupled with the €140m acquisition cost and its current debt, this could have put Snai almost €1bn in the red.

It may appear strange that the Italian government is attempting to penalise one of the few growth sectors left in the country, especially as even if the companies were able to continue operating after being fined their budgets would be severely reduced, something analyst Fabio Pavan of Mediobanca believes could significantly affect the sector.

“I would say it is risky for Italy to put pressure on a sector in which the contribution of taxes is growing in triple-digit amounts. I expect that the sector would change, as you are talking about a segment that is going to face real pressure on its day-by-day activity if the fines are upheld,” he says.

The full version of this piece will appear in the April edition of eGaming Review.